FINANCING THE INSOLVENT COMPANY AN OVERVIEW

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1 FINANCING THE INSOLVENT COMPANY AN OVERVIEW M e Mark Schrager, Partner DAVIES WARD PHILLIPS & VINEBERG LLP

2 Financing the Insolvent Company An Overview The Insolvent Company The Bankruptcy and Insolvency Act ( BIA ) 1 defines an insolvent person as one: (a) who is for any reason unable to meet his obligations as they generally become due, (b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or (c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations due and accruing due. In discussing the financing of insolvent companies, we propose to first discuss briefly mechanisms to finance an insolvent company prior to seeking protection under either the BIA or the Company Creditors Arrangements Act ( CCAA ) 2. Often, a company that is insolvent because it falls into either paragraph (a) or (b) of the above definition will require the necessity of a formal filing under the BIA or the CCAA in order to obtain a stay of proceedings and protection from its creditors. Companies can, however, limp along without formal protection, under some circumstances, provided they have the support from their lender of operating funds. It is certainly possible, however, to be insolvent within sub-paragraph (c) of the above definition and to continue to operate a business, particularly with the support of the operating lender. 1 2 R.S.C., 1985, c. B-3, see s.2. R.S.C., 1985, c. C-36.

3 - 2 - With respect to the pre-insolvency filing situation we propose to examine financing through methods of retention of ownership as well as the continuation of existing operating loan facilities under the auspices of a forebearance agreement. Secondly we will examine in more detail the situation after a formal insolvency filing. In such regard we will discuss various issues involving loans under such circumstances referred to as DIP financing. All of these mechanisms are essentially temporary mechanisms as the insolvent company will ultimately either work its way out of insolvency or succumb to insolvency and be liquidated. Forebearance Agreement A forebearance agreement (sometimes referred to as a standstill agreement) is an agreement between a lender and a borrower forebearing the right to immediate repayment of a loan. It is, in effect, often used as an amendment to a loan agreement whereby a lender will continue to finance the operations of a company which is in default of the terms and conditions of its loan agreement. The entering into of a forebearance agreement will often, though not necessarily, be preceded by a notice of default by the lender and perhaps a demand for repayment of the loans as well as a notice of intention to enforce security required by s.244 BIA 3. Though recourse is often had to a forebearance agreement in insolvency situations, there is little substantive comment either in the literature or in the case law. 3 A secured creditor who intends to enforce its security on the business assets of an insolvent debtor must give ten days prior written notice.

4 - 3 - A forebearance agreement will set out the default and usually contain an acknowledgment thereof by the debtor as well as acknowledgments of the indebtedness and receipt of notice of default and the reasonableness thereof. The secured lender will not waive the default but will agree to forebear acceleration of its loans and often will agree to the continued financing of the company subject to the debtors compliance with the terms and conditions of the forebearance agreement. The forebearance agreement will set forth the conditions upon which financing will continue and, as such, will operate as an amendment to the loan agreement. As an amendment to the loan agreement, the forebearance agreement may contain provisions providing for a new interest rate(s), various fees including forebearance fees and collateral monitoring fees, additional security, additional terms, conditions and covenants. Particularly, the forebearance agreement may provide for a scheme of reduction of the amounts due to the lender and will often provide for the treatment of the lender in the event that the debtor seeks a stay of proceedings from its creditors, either by filing a notice of intention to file a proposal under the BIA or by presenting a motion to a judge under the CCAA. The forebearance agreement will generally provide that the debtor undertakes that in any such proposal or plan of arrangement that its secured creditor will be treated as an unaffected creditor ie. neither its debt nor its recourses will be compromised in any plan of arrangement nor subject to the stay of proceedings. In order for the existing secured lender to avoid the stay of proceedings imposed by the BIA 4 when a notice of intention to file a proposal is filed, the s.244 notice must be given and the ten- 4 S.69(1) BIA.

5 - 4 - day statutory delay waived by the debtor prior to the filing of the notice of intention to file a proposal. Advance waivers (eg. in loan agreements) are not permitted (s.244(2.1) BIA). The terms and conditions of the loan going forward under the forebearance agreement, will almost certainly and naturally be more onerous, not only in terms of increased interest rates but also increased monitoring of collateral, approval of expenditures, submission of cash flow projections and approval of a business plan. While secured lenders will often seek in the forebearance agreement an undertaking to provide additional collateral security, it should be remembered that additional collateral security from the debtor for existing loans may, in the event of a bankruptcy, be treated as a preference under s.95 BIA and, as such, subject to cancellation. This is not the case for new security for new advances nor is it the case for new security from third parties such as guarantors. Most often, the forebearance will provide for the financing of an insolvent person, going forward. Once the forebearance is put in place, the debtor company will usually and eventually need to seek the protection of the court either under the BIA or the CCAA and ultimately a compromise of its debt with its other (unsecured) creditors. Under the CCAA, the court can approve and order the continued use of the existing credit facilities subject to the forebearance agreement and that the existing lender will be an unaffected creditor (ie. not subject to the stay of proceedings nor to the plan of arrangement to be entered into 5 ). The forebearance can form part of the plan of arrangement 6. 5 See in KENT, Andrew J.F., MacFARLANE, Alex L. and MACROV, Adam C., Who is in Control? A Commentary on Canadian DIP Lending Practices, unpublished, May 2004 ( Kent et al. ) at page 36 Re:

6 - 5 - From the lender s point of view, should the process not resolve as described above, it benefits from an acknowledgment of the indebtedness and the defaults and a consent to the enforcement of its secured rights and the sale of collateral thereunder, all contained in the forebearance agreement. Retention of Ownership Mechanisms It is possible for a company, including a company in financial difficulties to finance the acquisition of certain assets or to enhance liquidity through various means of providing security by having the party making credit available hold title to the asset in question. In this regard, we refer to what is often called, in business, consignment sales or conditional sales and which in the Civil Code of Québec ( CCQ ) are referred to as instalment sales (see Art CCQ and following). Reference is also made to leasing (see Art CCQ). We also propose to examine briefly, factoring, or the sale of accounts receivable. Article 1745 CCQ provides that a seller may reserve ownership of the property sold until full payment of the sale price. Such reservations of ownership are subject to publication, in the Province of Quebec in the Registry of Personal and Moveable Real Rights ( RDPRM ) as are moveable hypothecs. The obvious advantage is that when ownership is retained, the asset will not become the property of the purchaser/debtor company so that it will not form part of the assets subject to any eventual bankruptcy nor will it fall under the security of an existing secured 6 Irwin Toy, (2 December 2002) Ont. 02-CL-4783 (S.C.J.), Farley J. and Re: A.G. Simpson Automobile Inc., (2 October 2001), Ont. 01-CL-4281 (S.C.J.), Farley J. See Re: Quintette Coal (1992), 68 B.C.L.R. (2 d ) 219 (B.C.S.C.), Thackray J.

7 - 6 - creditor. Obviously, in practical terms, to benefit from such purchase financing, the debtor must show itself able to make the instalment payments on the property purchased. It seems however that the reservation of ownership, in the event of a bankruptcy, will be opposable to a trustee in bankruptcy, even if it is not registered at the time of the bankruptcy 7. It does not appear that this position could be successfully asserted against a secured creditor with blanket or universal security on the class of property in question. Lack of registration would be fatal against such a third party. While this mechanism is most often used to finance the acquisition of equipment, it could even be used to finance inventory for resale in retail stores (often referred to in business terms as consignment sales ). By stipulating a retention of ownership and identifying the merchandise by the ticketing, tracked in a computerized inventory, the reservation of ownership can be made effective. The sale/retention of ownership contract provides for payment of the wholesale purchase price of all goods resold at retail during the course of a week (by way of example). The contract provides not only for the retention of ownership of the goods until full repayment but can also provide for segregation of the sales proceeds so that in the event of a bankruptcy, they be traceable and thus remain the vendor s property. While the seller may be vulnerable for a week s worth of proceeds, assuming good faith of the purchaser, such risk is manageable. The arrangement allows a retailer in the midst of a restructuring (under court authority or not) to obtain credit from a supplier while protecting the supplier. 7 See Lefebvre (Syndic de), [2004] 3 S.C.R. 326 (dealing with a long-term lease).

8 - 7 - It is also possible for insolvent businesses to obtain liquidity from the sale of capital assets and lease-back from the purchaser (Article 1842 CCQ). Since the lessee in our scenario is not in general terms creditworthy, the lessor must have confidence in the value of the asset on a liquidation resale to recover the sums advanced. While certain concerns can be raised as to the validity of such transactions and their opposability to a trustee in the event of an eventual bankruptcy, the amendments to the BIA in 1997 eliminating the concept of retroactivity of bankruptcy make it such that the status of secured creditor is evaluated as at the actual date of the bankruptcy 8. Moreover, given section 97 BIA since current adequate value is being given at the time of the retention of ownership, it is submitted that these transactions would not be liable to be set aside at the instance of the trustee in the event of a bankruptcy. Financing on the basis of accounts receivable or factoring is often available to a company of questionable solvency. Since the lender or factor purchases an account receivable at a discount and is satisfied with the existence and collectibility of such account receivable, the questionable solvency of the seller of the account receivable (ie. the supplier of the goods or services in consideration of which the account receivable is created) is not directly in issue. Collectibility is key so that satisfaction with the credit worthiness of the debtor of the account receivable (ie customer) is necessary to make the arrangement viable. As well a factoring company will often 8 S.71(1) BIA (repealed) provided for the dating back of the bankruptcy to the date of the filing of a petition for receiving order and sections 50.4(8)(a), 57(a) and 61(2) BIA provided similar retroactivity for notices of intention to file proposals and proposals.

9 - 8 - require a confirmation from the customer that the account receivable is due and not subject to any claim of compensation (set-off) or other defence (ie. defects in the goods purchased). The Supreme Court of Canada has recognized that a factoring agreement is not a hidden financing contract but a true contract of purchase and sale 9. This is important because title to the account receivable is of the essence to the factoring company. Where the accounts receivable are subject to security in favour of an existing lender, an inter-lender agreement will be required to provide a mechanism whereby upon purchase and payment of the price the security on the account receivable is deemed discharged. There are different modalities of factoring contracts providing for the purchase of accounts receivable with or without recourse back to the seller and with or without administration (ie. collection of the accounts receivable). The important point to retain for present purposes is that the purchase of an account receivable for cash allows a debtor to have immediate cash and liquidity usually in amounts greater than made available in traditional banking arrangements. Also, depending on the factoring arrangements, the factor may assume the risk of non-payment due to the insolvency of the customer. A detailed review of all aspects of the factoring contract is beyond the scope of this paper. It should be remembered that factoring is a useful mechanism for a technically insolvent 10 company to obtain financing for its operations. This mechanism is little used in Canada but fairly common in the United States Minister of National Revenue v. First Vancouver Finance, [2002] 2 S.C.R The company may have no shareholders equity on the balance sheet or its assets on a fair liquidation may be less in value than its debt. It may however have good sales to creditworthy customers going forward.

10 - 9 - Debtor-In-Possession Financing Introduction Debtor-in-possession financing ( DIP ) refers to the judicially supervised mechanism whereby an insolvent company is provided with interim financing, for use during and for the restructuring process. Often the court will authorize the lender to enjoy priority senior to pre-filing claims. DIP financing issues often focus on the competing interests of the debtor company and different classes of its creditors. The availability of DIP financing can be crucial in order for a company to be able to restructure its debt and business operations and successfully pursue its enterprise. In recent years, DIP loans have received much attention amongst the insolvency bar. As alluded to above, the two principal statutes dealing with insolvency in Canada are the BIA and the CCAA. Personal and small companies qualify for relief under the BIA, whereas the CCAA applies only to corporations having at least $5,000,000 in debt 11. Both statutes have simultaneous objectives of preserving a firm s going concern value where possible, maximizing creditor recovery and minimizing the potential damage to employment and communities caused by a bankruptcy. As DIP financing in Canada was developed under the CCAA, this statute will be the focus of our discussion. However, some current practice trends make DIP financing under the BIA proposals possible and practical. This may be a significant development in the restructuring of small and medium-sized businesses. Moreover the recent amendments to the BIA in virtue of Bill C-55 (discussed infra) once brought into force will enable companies filing proposals under the BIA to seek court orders for DIP financing. 11 Or in the case of a filing by a corporate family, a total of $5,000,000 (see section 3 CCAA).

11 The purpose of the CCAA is to facilitate a compromise between an insolvent corporate debtor and its creditors so that the company is able to continue to do business. 12 Given that, as a general rule, a company s assets are worth more as a going concern than on a liquidation breakup basis, the assumption underlying any attempt to re-structure under the CCAA is that a viable business should be able to negotiate a workout of its debt with its creditors, and to reorganize its operations for the future. The statute (at least until recently) is brief and non-exhaustive containing just 22 sections, and the courts have exercised their inherent jurisdiction to fill in the legislative gaps and give effect to the statute s remedial purpose. It is under this inherent jurisdiction, that the Canadian courts have, through inspiration from U.S. bankruptcy law, developed the notion of DIP financing over the last fifteen to twenty years. There was no explicit statutory provision in the CCAA prior to Bill C-55 providing for DIP financing. An insolvent company may seek protection under the CCAA, by applying to the court for an order staying all proceedings against it pending a meeting of its creditors to vote on a proposed plan of arrangement. During this stay period 13 the company would remain in possession of its assets, and would continue operations. While the stay of proceedings is essential in that it provides a moratorium designed to foster a workout solution with creditors, it does not solve the problem of financing the day to day operations of the business. A workout solution three months after filing is useless if the company, for financial reasons is forced to close its doors today. Though they are prevented from initiating proceedings, suppliers, employees and other stakeholders fearing that they will not be paid may imminently sever their relationship with the In Re: Alberta-Pacific Terminals Ltd. (1991), 8 C.B.R. (3 d ) 99 (B.C.S.C.), Huddart J at para. 7. The stay granted by the Court, on the initial application will be limited to 30 days, with the possibility to extend the stay s.11(2) CCAA.

12 firm. The company requires the financing during the stay period in order to remain operational. In other words, the company needs financing to keep the lights on 14. As may be expected, money lenders, whether they are existing or new, are hesitant to extend credit to an insolvent company, without having a reasonable guarantee that they will be repaid. Accordingly DIP lenders will require security on the company s assets and generally insist that this security will be first ranking. This poses a problem as generally, the debtor company does not have unencumbered assets for the DIP lender to charge as security, the tendency being for the principal lender (often a chartered bank) providing operating facilities to take blanket security on all the company s assets or at least on the immediately realizable assets (ie. inventory and accounts receivable). Thus in order to allow a company subject to the CCAA to obtain DIP financing, the courts have allowed DIP loans to rank in priority to those of pre-ccaa filing creditors. The lender now has the security needed to extend credit. The problem however is that the pre-filing secured lender, who likely had lent money on condition of having a first rank charge, is being primed or forced judicially to cede priority of its security. Courts in granting DIP financings will strive to reach a balance taking into account the interests of all stakeholders including: (i) the secured creditor who originally lent money in consideration of first ranking security; (ii) the company in urgent need of funds; (iii) the mass of ordinary creditors who may lose existing claims as well as a customer for the future if the company goes out of business; and (iv) employees who may lose their jobs. It is these sort of issues that are raised in DIP financing proceedings. 14 Re: Royal Oak Mines (1999), 6 C.B.R. (4 th ) 34 (Ont. Gen. Div.), Blair J. ( Royal Oak Mines ).

13 The story of a fish farm In order to flesh out the considerations of the different parties in a DIP setting, we will present a fictitious example, loosely inspired by a recent case of the New Brunswick Court of Queen s Bench 15 : Since the mid 1990 s, Fish Farm Inc. ( FFI ) has owned and operated a fish farm in Atlantic Canada. In order to begin operations, in 1995, FFI obtained an initial $3,500,000 loan from Atlantic Investment ( AI ) who took first rank security on all FFI s fixed assets. Over the last decade, FFI has been slowly paying back the principal and interest owed to AI. FFI has an $800,000 revolving line of credit from Fisherman s Bank (the Bank ) which is fully drawn down. The various suppliers, the municipality (for business and real estate taxes) and the Canada Customs and Revenue Agency are together owed one million dollars. The Bank has first ranking security on inventory and accounts receivable. Fish farming is a slow and painstaking process requiring long waiting periods between the birth of the fish and their sale. The maturation period sometimes lasts up to two years so that FFI will regularly not generate any revenue for an extended period of time while still paying the costs of feed, wages, insurance and loan repayments. In early July 2006, roughly six months before the current crop of fish will reach maturity and are at their optimum value, FFI having drawn on its credit facility to the maximum found itself unable to pay creditors in the normal course of business. FFI needs financing urgently as at the 15 Re: Simpson s Island Salmon Ltd. (2005), 18 C.B.R (5 th ) 182, Glennie J.

14 present rate, the company only has money to keep the farm operational for another month. FFI has already defaulted under the credit conditions applicable to both its loans. Management is considered to be honest but relatively inexperienced. There are substantial orders on hand from credit-worthy customers but the orders are subject to cancellation for late delivery. FFI files an application under the CCAA and is granted an initial stay of proceedings. The company then approaches both AI and the Bank requesting financing, during the stay of proceedings, in order to allow the fish to be sold at maturity, and to thereafter reorganize the company s business. The Bank is not interested while AI, though typically not a lender of operating funds is interested, but insists on a first rank charge other than its existing charge on fixed assets - in other words a first rank charge on inventory and accounts receivable. While the current crop of fish could be sold now, allowing the fish to mature for another six months will double their current value. This simple fact pattern presents a good illustration of issues involved in DIP financing. FFI is in a dire financial situation: it needs money to pay for feed, wages, insurance and operating costs. Moreover the various lenders, having not received their monthly payments are likely to consider realization on their security. Without an urgent injection of funds, the fish will have to be sold immediately to a competitor (at a significant loss) and the business and remaining fixed assets may thereafter be liquidated. Fortunately for FFI, there is a DIP lender willing to offer the essential interim financing but it wants a first rank charge on inventory but a priority charge already exists in favour of the Bank. In this type of situation the court will be called upon to authorize the DIP financing and grant the super-priority charge on inventory in favour of AI. In determining whether or not to authorize the DIP facility, the courts will evaluate several factors,

15 such as whether or not the Bank is likely to suffer a prejudice from the priming of its security. It appears that there is sufficient surplus value in the inventory and resulting accounts receivable but only if the lights stay on for six months to allow the fish crop to mature. Who will provide the DIP Loan? DIP financing can be highly profitable. The rates of interest and loan fees charged are high presumably to offset the risk of lending to an insolvent company. Ironically, particularly in the case of a DIP loan from a new lender first ranking security will be demanded, also to offset the high risk. In Canada restructuring financing has often come from pre-filing or other senior secured creditors. However the trend appears to be moving towards a mix of pre-filing and new, speculative lenders 16. Nevertheless, anecdotal evidence suggests that in most cases it is the existing lender who is providing the DIP facility 17 which mirrors the statistics in the United States 18. In fact, existing lenders have an informal right of first refusal on the loan 19 and often seize the opportunity when they have it. Existing lenders may offer DIP financing as there are lucrative benefits stemming from the prefiling relationship. The existing lender has intimate knowledge of the borrower s business, SARRA, Janis P., Governance and Control: the Role of Debtor-in-Possession Financing under the CCAA, Annual Revenue of Insolvency Law, 2004 ( Sarra ) at page 124. Ibid. at page 132. U.S. statistics suggest that it is the existing lender who provides some or all of the DIP loan in 58% of Chapter 11 cases. SANDEEP, Dahiya et al, Debtor in Possession Financing and Bankruptcy Resolution: Empirical Evidence, (2003) 69 J. Fin. Econ. 259 at 265 cited in Sarra, supra note 16, at page 132. Kent et al., supra note 5, at page 11

16 management and security, as well as industry-specific information. They are therefore in a position to make quick decisions with transaction costs lower than those of a new lender. Moreover, since the DIP lender plays a vital role in dictating the restructuring of the company, existing creditors will often perceive there to be an opportunity cost associated with not providing the interim financing. The pre-filing creditor already fears for the safety of its original loan and wants to ensure that the restructuring of the company is performed in a manner which protects this claim. In other words, it is often preferable to increase the credit rather than risk losing the hierarchical priority of the claim which could happen when the existing lender has its security primed by a new DIP lender 20. Finally, the ability to cross-collaterize claims appears to be an additional advantage for existing creditors to provide the DIP facility. Cross-collaterization refers to using the DIP facility as a means of securing pre-filing claims in addition to obtaining security for the fresh funds. Such was the case in Air Canada 21 where under the terms of the DIP financing agreement General Electric Capital Canada Inc. ( GE ) secured performance of pre-filing obligations which were owed under aircraft leases to GE Capital Aviation Services Inc., an affiliate of the DIP lender. In doing so, GE significantly improved its pre-filing position and ensured a greater return on the leases in the event of a liquidation Sarra, supra note 16, at page 132. Air Canada, Re: (2003), 2003 Carswell Ont 1220 (Ont. S.C.J.) [Commercial List] cited in Kent et al, supra note 5, at page 11 as Re: Air Canada April 1, 2003 Toronto 03-C.C Ont. S.Ct.; see Farley, J. unreported reasons January 16, 2004.

17 In addition to profit and cross-collateralization (for an existing lender) a DIP lender can exert much control over the company in restructuring through the terms, conditions and covenants of the lending agreement. Moreover, the DIP lender is well positioned to become the lead lender of any successfully re-structured company or, should the outcome be a liquidation, as first ranking secured creditor, the DIP lender is well positioned to control that process. Despite the foregoing considerations, existing lenders may, for any number of reasons, refuse to be the DIP lender, as in the foregoing example of the fish farm. Such reasons may include the existing secured creditor not having faith in management while being confident that full recovery could be had from the collateral at existing levels of debt. In such a scenario, an existing secured lender would understandably prefer a liquidation. It thus becomes necessary to identify a new lender. In our fish farm example, there appears to be an enhancement of the value of the assets with fresh funds and more time. This leaves room for DIP financing with a priming order while respecting the collateral of the existing secured lender. Evolution of DIP financing in Canada In Re: Dylex Ltd. 22 ( Dylex ), Justice Farley stated that the history of CCAA law has been an evolution of judicial interpretation This flexible and creative approach has been particularly employed in the development of DIP financing under the CCAA (1995), 31 C.B.R. (3 d ) 106 (Ont. Gen. Div.), Farley J. NADLER, I. Berl, Debtor-in-Possession Financing: The Dark Lending Hole, The Canadian Institute, 2004 ( Nadler ) at page 3.

18 The concept of interim financing and the court ordered super-priority charge is rooted in judicial receivership cases, which up until the early 1990 s applied equally to situations under the CCAA 24. In these cases, interim financing for the debtor company was included in the expenses of the receiver and the priority status of loans followed the teaching of the Ontario Court of Appeal in Robert F. Kowal Investments Ltd. v. Deeder Electric Ltd 25 ( Kowal ). In Kowal, a judicial receiver had been appointed in respect of the property and assets of a partnership without the consent of the mortgagee who possessed a charge on the partnership lands. The issue centered on whether the receiver should be granted a charge over the partnership assets, ranking above that of the mortgagee, for monies advanced in respect of payments made by the receiver during the course of the receivership 26. The Ontario Court of Appeal refused to grant the receiver priority status, yet provided three non-exhaustive exceptions where the security of existing creditors could be subordinated: (i) consent of the existing secured creditor; (ii) the receiver has been named to preserve and realize assets for the benefit of all interested parties including secured creditors; and (iii) the receiver has expended money for the necessary preservation and improvement of the property Ibid. at page 4. (1976), 9 O.R. (2 d ) 84. Kent et al., supra note 5, at page 5. Kowal, supra note 25, at pages

19 These exceptions effectively served as the foundation upon which corporate debtors in CCAA proceedings, attempted to have their restructuring costs charged on the debtor s property ranking above other secured interests 28. In the 1990 s, Canadian courts began to show a greater willingness to approve DIP financing and super-priority claims in CCAA restructurings as compared with the judicial receivership context. In Re: Westar Mining Ltd. 29 ( Westar ) the approach of the courts shifted, and the application of the receiver-manager approach was specifically rejected in the CCAA context, Justice Macdonald claiming that he preferred to revert to what is fair and just in the particular circumstances of this case 30. In Westar, the court had ordered suppliers of goods to extend further credit to Westar during the interim period. The court subsequently concluded that it lacked the jurisdiction to issue that particular order, but based on its inherent jurisdiction issued a first charge over Westar s interest in the Greenhills mine for credit that had been given and any other credit which suppliers would be willing to extend during the restructuring period. This was done despite the fact that Westar s co-venturer in the mine objected to the granting of the security because Westar had agreed to keep its interest in the mine unencumbered. It is important to note however that the assets in ZIMMERMAN, H Alexander, Financing the Debtor in Possession, Insolvency Institute of Canada Tenth Annual Meeting and Conference, (November 1999) cited in Kent et al., supra note 5, at page 7. (1992) 14 C.B.R. (3 d ) 88 (B.C.S.C.), Macdonald J. Ibid at page 94.

20 Westar were unencumbered and while the court was willing to issue a first charge, secured creditors were not subordinated in this case 31. The Dylex 32 case is widely regarded as the first Canadian restructuring where super-priority DIP financing was awarded over the objections of a secured creditor. Dylex had determined that it required $30 Million in order to remain afloat during its restructuring period. The principal existing lenders at the time were the Royal Bank of Canada ( RBC ) and the Bank of Montreal ( BMO ) who were already owed significant sums at the time of the CCCA filing. Both lenders had blanket security over Dylex s assets. RBC offered to provide the DIP loan and insisted that it obtain: (i) a super-priority charge on inventory and receivables, ranking above the existing charges held jointly by the two banks; and (ii) a $1 million arrangement fee. BMO objected to the fee, yet Justice Houlden, relying on the courts inherent jurisdiction, approved the DIP facility. Justice Houlden concluded that BMO would not be prejudiced as the interim financing would generate revenues which would pay the advances, so that BMO would remain fully secured. Another significant advance to the DIP financing case law came Re: Skydome Corp. 33 ( Skydome ) and Royal Oak Mines 34 where the court approved super-priority DIP facility over the objections of secured creditors because the courts found that the risk of prejudice to the 31 A similar situation occurred in Re: The T. Eaton Co., [1997] O.J. No (QL) at para. 29 et fol. (Ont. Gen. Div.), Houlden J /01/95 Doc B-4/95 Ont. Gen. Div (Houlden) cited in Kent et al., supra pp (1998), 16 C.B.R. (4 th ) 118 (Ont. Gen. Div.), Blair J. 34 Royal Oak Mines, supra note 14.

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